- The dollar is coming under pressure again; the stimulus bill discussions refuse to go away; there are no US data releases today
- ECB officials are sounding very dovish; both sides of the Brexit debate are showing willingness to compromise; Moody’s UK downgrade late Friday has had little impact on UK assets
- Japan September trade data improved but remain weak; Chinese data overnight remain supportive of the recovery narrative; NZ Prime Minister Ardern easily won weekend elections
The dollar is coming under pressure again. DXY traded last week at the highest level since October 2 but similar to other bouts of risk-off buying, it has been unable to breach the 94 area. With market sentiment improving, we feel this level will remain very tough to break and look for DXY to test the bottom of its recent range near 93. Strong China GDP data is helping market sentiment recover, with most global equity markets up on the day and US futures pointing to a higher open. The euro is higher after finding support near $1.17, while sterling is trading back around $1.30 on some optimistic Brexit-related news (see below). USD/JPY continues to hold above 105.
The stimulus bill discussions refuse to go away. Tuesday is the new informal deadline set by House Speaker Pelosi over the weekend. This happened after President Trump upped his offer to match the Democrat’s $2.2 trln spending proposal, or even “a bigger number.” Republican Senators (via Mitch McConnell) remain steadfast in rejecting a large package. Senate Republicans are refusing to go beyond $500 bln and that is why we think a deal is ultimately unreachable. Furthermore, Mnuchin travels to Israel, Bahrain, and the UAE this week, removing a key player in stimulus negotiations.
There are no US data releases today. However, there is a full slate of Fed speakers as Powell, Williams, Clarida, Kashkari, Bostic, and Harker all speak. Bank of Canada releases the results of its Q3 Business Outlook Survey.
ECB officials are sounding very dovish. Over the weekend, Madame Lagarde warned that new restrictions meant to curb the viral spread will increase uncertainty for companies and families. She added that the bank’s toolbox is not exhausted and “If more has to be done, we will do more.” Lagarde was not alone. Panetta (Italy), Knot (Netherlands), Rehn (Finland), and Visco (Italy) were all very concerned about the eurozone outlook. Of note, the fact that central bankers from the frugal nations are sounding dovish suggests that Lagarde will not face too much opposition to further easing. We expect more stimulus from the ECB at its December 10 meeting, when new macro projections will be released.
Both sides of the Brexit debate are showing willingness to compromise, as we had expected. German Chancellor Merkel signaled a softening on state aid rules while UK Prime Minister Johnson said he would revisit the Internal Market Bill. He may not have a choice here, as the Internal Market Bill makes its way through the House of Lords this week. Some believe that it will be watered down in an effort to help seal a Brexit deal. It’s all moving according to our script: we are approaching the point (though not yet there) where constructive conversations can happen. Talks will probably drag on until mid-November. Once again, we expect a face-saving skinny deal, which already seems price in by the markets. A no deal outcome will be GBP-negative and a substantial deal GBP-positive, but we suspect that the skew is to the upside given the dial is currently set to the pessimistic side of the spectrum. Since mid-September, sterling has been slowly clawing back its losses for the year but it still has a ways to go.
Moody’s UK downgrade late Friday has had little impact on UK assets. After it cut the rating a notch to Aa3 with stable outlook, gilt yields are up 1-2 bp across the curve today but sterling is one of the top performing currencies in the majors. Moody’s move matches Fitch, which cut the UK a notch to AA- back in March. S&P’s AA rating stands out now and is likely to announce a downgrade at its review Friday. Our own sovereign ratings model has the UK at A-/A3 /A-currently and so deeper downgrades are warranted.
Japan September trade data improved but remain weak. Exports came in at -4.9% y/y vs. -2.4% expected and -14.8% in August, while imports came in at -17.2% y/y vs. -21.4% expected and -20.8% in August. The net effect was to boost the surplus to its largest since early 2017, led by exports to the US, Europe, and China. Exports of cars to the US (+22%) and chip-making equipment to China (+47%) were particularly impressive. That said, Japan’s recovery is lagging as many of the countries in the region are already seeing y/y gains in exports. The strong yen is a concern, though it’s worth noting that the key JPY/KRW cross has been moving in favor of Japan since the beginning of September as won gains have picked up.
Chinese data overnight remain supportive of the recovery narrative. Q3 GDP rose 4.9% y/y vs. 5.5% expected and 3.2% in Q2. However, September IP rose 6.9% y/y vs. 5.8% expected and 5.6% in August while retail sales rose 3.3% y/y vs. 1.6% expected and 0.5% in August. This means Q3 ended on a strong note and bodes well for Q4. The more backward-looking GDP figure showed what we already knew: consumption recovery in China has been lagging the production and export side. But the September data points suggest that China’s rebalancing efforts (“dual circulation”) is happening. The question now is whether this process will continue apace if external demand starts faltering from second wave lockdowns in Europe and US.
New Zealand Prime Minister Ardern and her Labour Party easily won weekend elections. With the biggest share of the vote in over 70 years at 49%, Labour won 64 out of 120 seats in parliament. This is the first outright majority won by any party since proportional representation was introduced in 1996. While a victory was widely expected, we think the size of the win was a bit of a surprise. Labour will have to decide whether or not to include coalition ally Green Party in her government, which favors tough action on poverty and climate change. Overall, we believe continuity in fiscal policy and the pandemic response is positive for the nation’s outlook.